Is General Electric (GE) Bankrupt?

| March 6, 2009 | 0 Comments

This economy is dismal.  The unemployment numbers just crossed the news wire and we’re hitting new highs.  More than 600,000 people have lost their job just in the last month.  Right now the unemployment rate is at 8.1% – a level last seen in the early 1980s.  That recession was horrible… this is worse.

I’m wondering if GE could make it even worse?  More on that in a moment.

There’s a big problem with the unemployment numbers.  Think about this. For every person who has already lost their job, there’s got to be 2 or 3 others worried about losing a job.  Some firms are cutting back on hours. Others are asking employees to take unpaid vacation.

Every time a company announces layoffs it sends shivers up the spine of the collective workforce.

My back of the envelope estimates are ugly.  By my figuring, 25% to 30% (or more) of the nation’s workforce is either unemployed or worried about becoming unemployed.  It’s a scary thought that doesn’t do much for consumer confidence.  And that means spending and economic activity will remain low for some time.

Let me give you a perfect example why.

General Electric (GE), is the old stalwart of the financial markets.  Over 100 years ago, when Charles Dow created the Dow Jones Industrial Average, GE was one of his top picks.  He started with 12 companies and GE was one of them.

It’s the only company in the index since its founding.

Now that very survival is in question.  Shocking isn’t it?  In this market some companies are trading at levels not seen in decades.  Strong brand name companies are treated like the walking dead and the bankrupt.  If GE were to go bankrupt, more than 300,000 jobs would be in question.

Just look at GE’s stock and options.  The stock is at 18 year lows.  Let me say that again.  The stock is trading at 18 year lows.  The options market looks worse.

As you know, put options give option traders the opportunity to sell stock to another investor at a fixed price.  It’s a bit complicated but here’s what you need to know.  Put options go up in value when the underlying stock goes down.  So if you buy put options on GE, you’re expecting the stock to fall.

Unbelievably, options traders were buying put options by the bucketful on GE.  The scary statistic is the options they were buying had a strike price of $2.50 a share.  That means these options would only be worth more money if GE fell below $2.50 in the next few months…

Can you imagine GE trading below 2.50… that would put the company on the verge of bankruptcy.  There’s a ton of traders who think its a distinct possibility.  And they’re willing to risk huge amounts of money on the trade.

Knowing this, do you think the 300,000 plus employees feel their job is safe?  I don’t exactly see them running out to buy new homes, cars, or expensive electronics anytime soon.  If the bad news at GE continues, the economy could get worse.

Personally, I think the sell off is overdone.  I own GE in my own account, and considering its value today, I’m considering investing even more money.  I might be wrong, I know that’s happened on occasion.  But I also might be right.

If I am, can you imagine owning GE at around $7 a share!  Consider buying some for your own account today.

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Category: Bonds

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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